What is a Certificate of Deposit and What Are its Pros and Cons?

Savings accounts aren’t the only option you have when saving for the future. A Certificate of Deposit (CD) can also help you reach your goals. CDs come with fixed interest rates, so you’ll know exactly how much you’ll earn on each deposit. You may even get a better interest rate than a regular savings account.

At American Savings Bank, we’re here to provide you with a safe and secure way to grow your savings. Read on to learn more about CDs and how to get started saving today.

What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a type of savings account with a set interest rate and a specific withdrawal date. This means you’ll earn a fixed amount of interest, compounded daily, over a set number of days, months or years. When your CD reaches the end of the set period, called the maturity date, you can withdraw your initial deposit and the interest you’ve earned.

ASB and other banks offer fixed interest rates on CDs because you agree to keep your money in the CD account until the scheduled date of withdrawal. Unlike a normal savings account, your CD interest rate does not fluctuate. Keeping your money in the account for a set term also makes it easier for banks to offer higher rates than regular accounts.

It’s important to be careful with CDs, as taking your money out before the maturity date could result in early withdrawal penalties. It’s best to plan ahead when opening a CD: consider using a separate savings account as a rainy day fund in addition to your CD, so you’ll still have access to cash in case of an emergency.

Common Certificate of Deposit (CD) Terms:

• Rate: The fixed interest rate you’ll earn during the length of your CD.

• Term: The set period of time you agree to keep money in your CD.

• Maturity Date: The scheduled end of your CD term. You can withdraw your money without early withdrawal fees starting on this date.

• Minimum Deposit: The minimum initial deposit to open a new CD.

• Principal Deposit: This is the amount of your initial deposit into your CD. You can usually deposit any amount over the minimum required deposit.

• Withdrawal Penalty: The fee you may incur for withdrawing money from your CD before its maturity date.

• Jumbo CD: A special type of CD designed for large deposits.

• Annual Percentage Yield (APY): The rate of return taking into account the effect of compounding interest.

Pros and Cons of Certificates of Deposit (CD)

Like any type of financial account, CDs come with advantages and disadvantages. It’s a good idea to weigh the pros and cons of a CD before you open an account.

When should you get a CD?

CDs are a low-risk savings option that can help most people save for the future. You might want to consider using a CD, instead of a traditional savings account if you:

• Have a Specific Savings Goal: Are you saving for a new car, down payment on a home or just a new set of furniture? A CD is an easy way to save for the future while earning fixed interest on your savings.

• Won’t Unexpectedly Need the Money: A CD is a good option for saving if you already have a separate savings account for emergencies.

• Are Risk-Averse: You could potentially see higher returns by investing your money into stocks or bonds. However, those investments could be volatile and risky. Investing in a CD is a safe option for risk-averse investors.

Wondering how much you could earn from a CD? Try our CD calculator to get a better idea of the growth potential of your initial deposit.

Ready to open a CD? Apply online today or make an appointment with one of our helpful bankers to get started!

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